Sunday, January 1, 2012

Fearless Forecasts for 2012

A brief note before I make my forecasts.

As the great economists Murray Rothbard, Ludwig von Mises and Friedrich Hayek taught, economics, and all sciences that study human action, are not capable of helping us make exact forecasts in the manner that we can in, say physics. With the help of physics, we know that if we put X amount of fuel in a rocket ship, the rocket ship will travel Y miles. This is so because there is a constant relationship between fuel spent and distance traveled.

In the science of economics (and praxeology) there are no such constants. As Mises wrote:
Nothing could by more mistaken than the now fashionable attempt to apply the methods and concepts of the natural sciences to the solution of social problems.
and he went further:
There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 percent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 percent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or in another time. He has not "measured" the "elasticity of demand" of potatoes. He has established a unique individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions. . . .The impracticability of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations. .
This does not mean we can know nothing about the future, we can have suspicions and speculate, but there will not be the exactness of forecasts that exist in physics. As far as forecasting goes, economics is perhaps best understood relative to the state of long range meteorological forecasts--though human action is much more complex.

We "know", for example, that in the northern hemisphere that it will be cold in February and hot in August, yet, we can not today forecast the exact weather on February 23, 2012 or August 9, 2012. The factors involved to determine the exactness of the weather on those dates are too many to determine an exactness today. Yet, at the same time, it does not mean we know nothing. We know things within a framework.We know that it is likely to snow and February and highly unlikely in August. We know that you shouldn't plan a trip to the beach, with only a bathing suit in a convertible, top down, in February in the Northeast and we also know that it would be silly to plan on wearing a fur coat, gloves and ear muffs in New York City in August---despite the fact that we can not know today what the exact weather will be on February 23, 2012 or August 9, 2102

In the same way, we know that an increase in the money supply will have a tendency to push prices higher, though the desire to hold cash balances and the quantity of product produced will also have an impact on prices. Thus, if the central bank is increasing the money supply rapidly, we may loosely say that it is "inflation season". It is, though, impossible to predict the exact price inflation rate six months out.

However, if we roughly see no major increases in productivity on the horizon and we see some key prices such as food and energy climbing (indicating a decline in the desire to hold cash balances), we may speculate that, if in addition to these possible on-going factors, that the Fed is printing money at double-digit rates that price inflation will accelerate.

In this way, while economics can not provide exactness to forecasts, it can none the less provide important warnings. If an economist ventures to say, we are in a "season of potential price inflation", we may decide not to buy long-term bonds and instead lock in interest rates on borrowed money.

It is thus with this caveat that I launch my fearless forecasts, which do not have the absoluteness and exactness that can be achieved in the science of physics. They are speculations based on observing various data, but which are incomplete because of the fact that we can not know in advance how all human action will develop.

These forecast should thus be looked as in terms of providing guidance as to potentialities that should be considered rather than exactness.

Forecast 1: Oil prices will climb above $120 per barrel (West Texas intermediate crude)

Forecast 2: The consumer price index will begin to show increases on an annualized monthly level , even at the "core" level,  of between 5% and 7%. If Bernanke keeps annualized money supply growth above 8% for the first half of the year, the headline consumer price index will climb well into double digits.

Forecast 3: The U.S. stock market will start off very strong in 2012.

Forecast 4: The Chinese stock market and economy will collapse.

Forecast 5: Official BLS data will show unemployment dropping below 7.5% by mid-2012

Forecast 6: In 2012, the U.S. bond market will see the start of a multi-year downtrend.

Forecast 7: Despite current statements to the contrary, Ben Bernanke will start raising short-term rates by the end of 2012 (Perhaps immediately after the elections)

Forecast 8: The growing "white balloon" protests will put the March elections in Russia in  jeopardy.

Forecast 9: Hillary Clinton will become President Obama's vice-presidential running mate.

Forecast 10: New York City mayor Michael Bloomberg will enter the presidential  race as a third party candidate. He will spend a half-billion of his own money in an attempt to win the presidency.


  1. I'm trying to read between the lines of your forecasts, and am curious where Ron Paul fits in.

    Here's what I came up with:

    Even though the stock market starts off strong, it resumes it's bear market decline. This coupled with rising consumer prices fuels the Ron Paul campaign. In order to counter a Paul/Napolitano ticket, Obama chooses Hillary as his running mate...Even Bloomberg will spend half a billion to stop Paul/Napolitano.

    After Ron Paul is elected President, Bernanke (in the footsteps of Nicholas Biddle) raises interest rates in order to hurt the newly elected President with a massive depression.

    Or, a la your explanation at the beginning...I'm totally off :)

    Happy New Year!

  2. Ohhhhhh, Bob, you're sticking your neck out! Although predictions are frowned on by Austrians (can't recall the term) yours sound reasonable.

    We shall see...


    PS- happy new year from Sri Lanka!

  3. Your predictions seem reasonable and defensible, Bob.

    What is your prognosis for gold and silver in 2012?

    Nice interpretation work, Chris R.!

  4. Can't see how being VP would be that good for Hilary, especially if Barry just ambles around not doing much of anything for the lame duck years, even worse if some very awkward subject comes up. She has good numbers now but that's because she's DC's chief imperial scold and not annoying Americans. She'd be better off if Barry lost and being the senior Democrat in 2016.
    A Bloomberg shot would just make it official that there's an Establishment party and the republican and democratic parties would disappear and therer would just be factions within that group.

  5. Happy new year!

    I'll add one more forecast:

    EPJ crosses 15 million hits in 2012.

  6. the us bond market will be a grave maker for the shorts. I just think its going to take a lot more time before it begins to break. And a china slow down i think will have a big impact on industrial commodities.

  7. Are you predicting Bernanke will raise rates near the end of 2012 because you are predicting a Paul win, and the establishment will want to blame the resulting bad economy on Paul?

  8. Well, Bernanke can begin raising short term interest rates and abide by the current FOMC language, which says they are to remain exceptionally low throughout mid-2013. Conceivably, this could be 1.00% (75 bps above the current FF target). And, it will be the market that finally forces his hand. If Bernanke makes the decision to cede control over the size of the Fed's balance sheet, it will be to defend the long end.